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“To achieve superior investment results, you have to hold non-consensus views regarding value, and they have to be right. That’s not easy… The good news is that the prevalence of first level thinkers increases the returns available to second level thinkers. To consistently achieve superior investment returns, you must be one of them.” -Howard Marks, The Most Important Thing

This is one of my favorite investing quotes because it helps to explain how asset prices move. Many investors are surprised when a company reports good earnings and its stock price sells off or vice versa. What they don’t understand is that price moves come about as a reaction to results versus the consensus not results versus company guidance or prior results or their peers or anything else. This is what separates “second level thinkers” from “first level thinkers”; they understand this crucial distinction.

To the extent this distinction is true, and I believe it is at least most of the time, then the first step in trying to anticipate any future price movement is to understand the consensus. What is it that is already priced in? The way to answer this is to simply observe what “first level thinkers” are saying about it. These can be individual investors, even most institutional investors or, better yet, the media. As my friend Peter Atwater likes to say, “media reflects mood,” and, for this reason, it’s hard to find anything more valuable to determining what the consensus is (and how confident that consensus it).

There are a couple of wonderful, recent examples to better give you an idea of what I’m getting at here. First, we have the bottoming of the gold price about three years ago. After four straight years of painful price declines, the consensus had turned very bearish on the precious metal. There was no better representation of this than a headline in the Wall Street Journal confidently declaring it worthless. Clearly, “first level” thinkers had all thrown in the towel such that any positive news, or even any less negative news, regarding gold had the potential to affect the price in a positive manner. In fact, that’s just what happened as gold bottomed shortly afterward and hasn’t seen those levels since.

Another example of this phenomenon could actually be related to the negative consensus in gold and that is the recent positive consensus towards Bitcoin. Here, there was an extremely bullish consensus exemplified by a New York Times article that ran at the beginning of this year. The headline confidently proclaimed the wealth-generating benefits of the cryptocurrency while simultaneously shaming those who didn’t get it. Clearly, “first level” thinkers could have hardly been more optimistic than they were back then. In hindsight, it’s obvious that this meant any potential good news about it was already priced in and that any negative news had the potential to represent a significant turning point. And this is just what we have seen since then.

It’s not hard to imagine that some of the euphoria surrounding bitcoin and other cryptocurrencies possibly contributed to the negativity surrounding gold as an alternative currency. Still, there is a ton of negativity surrounding gold even though the price remains 20% above its lows from three years ago. Ironically, though, the crash in cryptocurrencies could prove to be the sort of positive news for gold that is not at all priced in at present. Certainly, there are other reasons for gold prices to do well going forward but none of them may be as critical as this sort of news flow as it relates to the consensus. At least, that is how “second level” thinkers are looking at it.